Should You Add YUM! to Your Portfolio?

When it comes to corporate earnings, people look to firms that can generate growth for many years. Long-term investing is about making inroads either in new markets or in new technologies that will take market share from competitors. When it comes to expanding in new markets, American restaurants have a tremendous potential in foreign countries.

The latest example of international expansion—as well as a recent rebound in the U.S. market—helping to drive corporate earnings is YUM! Brands, Inc. (NYSE/YUM). YUM! is the parent company of Kentucky Fried Chicken (KFC), Taco Bell, and Pizza Hut. The company recently posted corporate earnings growth of 23% for the quarter year-over-year. While some people are worried about higher costs, the company was able to actually increase its restaurant margin to 18.9%, up 1.9% from last year.

Interestingly, the company cited that, compared to last year, the U.S. market is having a rebound. Part of this, I believe, is due to its expanded menu and offering consumers an alternative choice to Chipotle Mexican Grill, Inc. (NYSE/CMG). YUM!’s Cantina Bell restaurant is showing strong signs of domestic growth, helping drive the stock’s corporate earnings. Taco Bell’s same-store sales in the U.S. rose six percent, compared to the year-ago period; obviously, demand is increasing domestically.

When it comes to long-term investing, corporations that can continually innovate with product offerings and can grow in new markets should be on one’s radar screen. YUM! has just over 4,900 stores in China and roughly 500 in India, as compared to approximately 18,000 American stores. Obviously, there is a significant growth potential for long-term investing in these emerging markets, which will drove corporate earnings.

In spite of the slowdown in the Chinese economy, the company increased corporate earnings growth with same-store sales of six percent and profit margins of 22% in China. YUM! is definitely focused on long-term investing, as David C. Novak, CEO of YUM!, stated that short-term changes in the Chinese economy will not shift the firm’s focus over the next decade. Novak fully expects corporate earnings growth to continue at a strong pace for many years.

Chart courtesy of www.StockCharts.com

One thing I do like about the executive team at YUM! is that their focus is solely on long-term investing to drive corporate earnings. This is a message that more investors should focus on, rather than short-term sentiment. Sure current economic conditions in China are slowing, but there is no question that YUM! will have more stores in 10 years than it has now.

The only possible knock against the stock is that it’s not cheap. Clearly, many institutions focused on long-term investing have continued to buy the stock on any significant pullback. Not only does the company have a good strategic plan for long-term investing that will drive corporate earnings, but the company also pays a dividend yield with a forward rate of approximately two percent, as the company just increased its dividend by 18%. This double-digit increase marks the eighth consecutive year that the company has increased its dividend. For those people interested in long-term investing, continued increases in a stock’s dividend are extremely important to overall return.

The recent trading range has just been broken to the upside with the latest corporate earnings report. Once again, negative talk regarding the economy drove the share price down, which was quickly followed by the firm beating expectations. While I do like this company in terms of long-term investing, I prefer buying on pullbacks and being more opportunistic. I would surely keep my eye out for any significant pullback in YUM!, as its growth in corporate earnings should continue for many years.

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